Journal of Applied Finance & Banking

Accounting Conservatism, Market Liquidity and Informativeness of Asset Price: Implications on Mark to Market Accounting

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• Abstract

  This paper theoretically examines the impact of conservatism on the asset price in an asset market allowing for strategic interactions among traders. Due to the trades coming from conservatism traders contain less informational content, the asset price is shown to be less informative in the presence of conservatism traders. In addition, this paper shows that the market liquidity increases as the proportion of conservatism traders increases. With mark to market accounting replacing the conservative accounting practice, the asset price will be more informative and the market liquidity will be reduced. From the perspective of the informativeness of the asset price, the results of this paper support mark to market accounting.